100% CRR for Banks, Nifty and Bank Nifty might see a Hit

The RBI has asked banks to temporarily maintain additional average daily balance with it for draining out the surplus liquidity with them. This follows the banking system being swamped with liquidity sparked off by a heavy inflow of deposits, because of the ongoing demonetization exercise.

The cash reserve ratio (CRR), or the portion of deposits that banks have to maintain with the central bank, however, continues at 4 per cent of deposits.

The excess of liquidity with banks is highlighted by the fact that they collectively parked RS. 2,27,242 crore in the three reverse repo auction conducted by the RBI on Friday.

In a circular to banks, the RBI said that on the boost in deposits between September 16 and November 11, scheduled banks will have to maintain incremental CRR of 100 per cent, effective from the fortnight beginning November 26. 

This may put pressure on Nifty share price which opened with the decline of 0.27% and Bank Nifty the most.

This measure is mean to absorb a part of the surplus liquidity arising from the return of the demonetized Rs. 500 and Rs. 1,000 bank notes, while leaving sufficient liquidity with banks to meet the credit needs of various sectors.

At present, all banks are to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight.

Surge in Deposits

The RBI observed that with the demonetization decision, there has been a rush in deposits relative to the increase in bank credit, leading to large excess liquidity in the system.

It assessed that the scale of surplus liquidity available with the banking system is likely to increase further in the fortnights ahead. In view of this, it has been decided to soak up a part of this surplus liquidity by applying an incremental CRR as a purely temporary measure.

As the incremental CRR is planned to be a temporary measure, it will be reviewed on December 9 or even earlier.

Parking of Old Currency Notes:

Also, to decongest storage facility of banks of old Rs 500 and Rs. 1,000 notes, RBI has allowed lenders to put such currencies at currency chests at the district level in view of rising deposits due to the demonetization drive.

The central bank said that a currency chest operating at the point to be called Designated Chest (DC) will be needed to operate a separate vault, to be named Chest Guarantee Vault (CGV), as an extended wing of it.

RBI said in a notification that Banks, preferably those not having any currency chest, will deposit such notes in sealed boxes and will get the value of the notes to the credit of their current a/c with the chest branch. The facility will also be accessible at post offices if they are maintaining current account with the chest branch managing CGV.

The notification further stated that the regional office of RBI will arrange evacuation of notes from the district chest on priority basis.

Thereafter, notes will be subjected to thorough examination and the recognition of deficiencies namely shortage, counterfeit notes, mutilated notes, etc during processing at RBI will be recovered from the chest which, in turn, will recover the same from the tendering bank or post office.

This is extension of the last week’s scheme. The central bank has decided to revitalize the Guarantee Scheme wherein banks can deposit the notes directly with the regional offices of RBI under whose jurisdiction they are located.